China in Africa: An Evaluation of Chinese Investment

[Pages:20]China in Africa: An Evaluation of Chinese Investment

By Thompson Ayodele & Olusegun Sotola1

1 Ayodele and Sotola are with Initiative for Public Policy Analysis (IPPA), an independent policy research organisation based in Lagos Nigeria. For further information:info@

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Executive Summary

China increased presence in Africa has been of interest to many. China's economic interest and investments in Africa have particularly been under scrutiny. While some are optimistic, some others are concern as to what is China's real interest. Many have argued that the engagement is apparently meant to repeat what western countries did decades ago when they exploited African resources. This has led many to question whether China is a new colonizer, an exploiter or a partner in development.

This paper shows that China involvement with Africa is not new. The first phase of Chinese engagement with Africa began during the Bandung Conference of Non-Aligned Nation in 1955. There was a substantial improvement in the relationship towards the end of 1950s as a result of its worsening ties with the Soviet Union. China then was looking for allies in Africa to establish a counter balance weight to Soviet hegemony and western imperialism. The relationship with Africa plummeted in the 1980s when China shifted its focus to domestic economy development.

Contrary to what many might think, China did not foist itself on African government like the Western colonialists who took up the administrative governance and resources of each country they colonized. Investment data shows a clear trend that this re-emergence is largely beneficial. Generally, a significant investment has come from Chinese state-owned enterprises but investment from the private sector is growing in an unprecedented manner.

More importantly, Chinese investment in Africa is not a threat to African countries and they are full of gains. First of all, Chinese government imposes no political conditions on African governments before signing contracts either for exploration or other economic activities. Secondly, Chinese firms are willing to invest where western companies are unwilling. Western investors and aid agencies are unwilling to invest in areas such as: physical infrastructure, industry and agriculture.

Trade data shows Africa's trade with China is highly concentrated in only a few countries. About 60 percent of Chinese exports are destined for just six countries. Beyond this, there is imbalance in the trade as the distribution of the trade produces net deficit. However, the balance of trade deficit is not due to trade in oil as only 9% of Chinese oil is imported from Africa, while the United States 32 per cent and Europe 33 percent. However, African leaders considered a closer economic and political relation with China as a guarantee for future economic prosperity.

China's economic rise is shaping the international order by introducing a new development paradigm. The economic growth of China and other Asian Tigers demonstrates that economic growth could be brought about by any types of government, democratic or non-democratic. However, Africa must strive more to leverage Chinese engagement for maximum benefit. The stream of aid and investment gives African countries a unique opportunity to translate these external supports into overall gains. To take full advantage of this relationship, African government must play their political cards well, not only as separate countries but also through the collective mechanism of the African Union.

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Introduction

China's re-emergence in Africa has been of interest to many. Its re-emergence in Africa is seen as a combination of optimism, concern and puzzlement. There is intense debate generated by this re-emergence which centred on two core issues: what motivates the present engagement and what are its implications for Africa's development? However, many have argued that the engagement is apparently meant to repeat what western countries did decades ago when they exploited African resources and governed same. This has led many to question whether China is a new colonizer, an exploiter or a partner in development. While there is no one-to-one way to disparage this, the fact remains that China sees the African continent as a new investment frontier and political ally. China is keen on exploring the opportunities the continent presents and prepared to continue giving development assistance to African countries.

China's recent economic interests and investments in Africa have put its bilateral relations with Africa under scrutiny. As a fact, the impacts of Chinese economic activities are being felt in many parts of Africa. The areas of impacts include Foreign Direct Investment (FDI), funding for infrastructural development and increasing the prices of African commodity products and introduction of low-price electronic and telecom hardware products.

This paper presents Chinese re-emergence showing the nature of the investment viz-a-viz that of the Western world. In the opening section, China's emergence and re-emergence in Africa are presented in historical terms. The paper further look at the investment patterns, the sector(s), the dichotomy between Chinese government and private sector led investments as well as implications for economic development in Africa. In addition, the paper also examines the trade between African countries and China, the balance of trade, trade deficit, likely African countries to benefit and likely African countries to lose and why. We would show that China's re-emergence is of immense benefits to African countries. Lastly, this paper will look at the lessons of development regarding China's re-emergence and the public policy implications for African countries particularly in terms of economic development and poverty reduction.

China in Africa: Historical Evolvement

The first phase of Chinese engagement with Africa began during the Bandung Conference of Non-Aligned Nation in 1955.2 There was a substantial improvement in the relationship towards the end of 1950s as a result of its worsening ties with the Soviet Union. China then was looking for allies in Africa to establish a counter balance weight to Soviet hegemony and western imperialism.3 Because of its own history of colonization, China saw itself as the leader of Third

2 Piet Konings, "China and Africa: Building a Strategic Partnership" Journal of Developing Societies, Vol 23: 3 ( 2007): 343 3 Piet Konings, 344

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World countries. African countries were therefore seen as natural allies4. In addition, China recognized the importance of Africa countries' in its diplomatic struggle with Taiwan. It realized that independent African countries were a key voting bloc within the United Nations (UN) and could help resolve to its advantage the diplomatic feud with Taiwan.5 Apart from having African countries on its side in the diplomatic squabble with Taiwan and gaining a seat at the United Nations Security Council, China had seen African counties as strategic partners since the 1950s. It funded many construction projects and supported independence struggles between the 1960s and 1970s. It promoted bilateral relations among African countries.6 During the period, China provided aid to thirty African countries7.

The relationship with Africa plummeted in the 1980s when China shifted its focus to domestic economy development. The period marked a gradual departure from socialist economic development to reform in favour of capitalist economy. The reform necessitated looking around for Foreign Direct Investment (FDI) from Western countries. However, the relationship with the West was cut-short when China was hit by economic sanctions and political isolation over the crackdown of students' protest in Tiananmen Square in 1989.8 China must have learnt a useful lesson during the isolation and sanctions imposed by the western nations that it would be counter-productive to trade and rely on western countries for Foreign Direct Investment. This prompted China once again to widen its contacts in the developing countries such as Africa.

China re-emergence in Africa

The 1990s marked an important phase in China's re-emergence in Africa. The period was characterized by unprecedented involvement in the continent. The relationship was broadened in various areas to include: trade, investment, development assistance, technology transfer and training. These areas witnessed increased activities and investments from both Chinese private sector and state-owned enterprises. It was also marked by advancement of development assistance to several African countries. One of the primary aims of this development assistance is geared toward focussing more on technical assistance and infrastructure development.

Contrary to what many might think, China did not foist itself on African government like the Western colonialists who took up the administrative governance and resources of each country they colonized. However, African leaders considered a closer economic and political relation with China as a guarantee for future economic prosperity considering China's accomplishments within a short period of time. Between 1981 and 2005, China reduced the number of people

4 Liang Zheng, "Neo-colonialism, Ideology or Just Business: China's Perception of Africa" Global Media and Communication, Vol.6: 3 (2010): 271 5 Piet Konings, 347 6 Liang Zheng, 272 7 Deborah Brautigam, "The Dragon's Gift: The Real Story of China in Africa (Oxford: Oxford University Press, 2009), 31 8 Liang Zheng, 272

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living in poverty from 84 percent to 15.9 percent.9 Also many African nations did not only see China as an economic partner but also a country which could offer an alternative development model. Moreover in terms of access to loans and funding for projects, African countries see China as an alternative to institutions such as the International Monetary Fund and World Bank.10 They also want to rely less on Western foreign investment and development assistance. Generally, China makes use of its aid and investment to support three core priorities: strategic diplomacy, ideological values and commercial benefit. Chinese engagement with Africa nations reflects these priorities.

First, as already noted, at diplomatic level China courts Africa to secure support for One China Policy. Secondly, at ideological level, China is of the view that it once occupied a position similar to Africa's current one. With low interest loans from Japan in 1978, (China and Japan were under a long-term trade agreement), to finance export of $10 billion in industrial technology and materials to China in exchange for Chinese oil and coal, China began the commencement of its economic development.11 China has employed similar agreements to forge its economic ties with Africa and for the latter's development. China sees its foreign aid and investment as working to promote Chinese economic interests as well as Africa's development.12 Having achieved a sustained economic growth, China sees that its development model could be a template for Africa's own economic emergence.

Almost half of the Chinese assistance is classified as official aid while the rest comprises concessionary loans and debt reliefs. In 1996, China provided $410 million in Overseas Development Assistance. This has swelled to more than $3 billion in 2007.13 The volume of Chinese aid including its concessional loans to Africa has grown from a total of $800 million in 2005 to a commitment of $10 billion between 2009 and 2012.14 However a secret database of Chinese aid to Africa obtained by the Washington-based Centre for Global Development (CGD) put the aid figure at $75 billion in 50 African countries from the years 2000-2011.15 In terms of infrastructure project, Chinese financing rose from $1 billion in 2003 to $7 billion in 2006.

9 "Poverty headcount ratio at $1.25 a day (PPP) (%of population),"World Bank, (accessed November 10, 2013) 10 Liang Zheng, 273 11 Deborah Brautigam, The Dragon Gift, 46 12 David Haroz, "China in Africa: Symbiosis or Exploitation, Fletcher Forum of World Affairs" Vol.35: 2( November 2011): 69 13 Because of transparency issue, it is difficult to actually obtain accurate figure for Chinese aid from government sources. I used the aid estimate given by Deborah Brautigam, The Dragon's Gift: The Real Story of China in Africa (Oxford: Oxford University Press, 2009) 14 Carnegie Endowment for International Peace, China's Growing Role in Africa: Myths and Facts, February 9, 2012: (accessed November 13, 2013) 15 Paul Eckert,New database focuses on China's secretive aid to Africa, Reuters, April 29, 2013: (accessed on November 15, 2013)

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China's aid is characterized by equality, and mutual respect for the sovereignty of the recipient countries. The loans are not conditional, interest free and repayment can be easily rescheduled. The loans are meant for projects that would generate income and make recipient countries selfreliant and not one that would make them depend on China.16 In addition, China's aid and loan is attractive to African leaders for four reasons: Firstly it is not characterized by conditionalities on good governance, fiscal discipline, and other conditions usually attached to western aid. Secondly, many African leaders and political elites are threatened by internal and external demand for political liberalization and democratization which are also parts of western donors' conditions.17 Thirdly, rather than using a country's debt to control its economy, China quickly grants debt cancellation as it did in 2000 when it granted debt cancellation totalling $1.3 billion to 31 African countries.18 Lastly, Chinese export credit has provided African governments with alternative sources of finance which have helped them to diversify trading partners for countries that have tended to remain glued with old colonial trading patterns. 19

Key drivers of the engagement

China's engagement with Africa is largely driven by the following key considerations: Firstly, China needs resources notably crude oil to power its modern, growing economy and to support its expanding industrial base. The rapid growth of its manufacturing sector has also created increased domestic demand for natural resources including oil and gas, precious metals, aluminium, copper and iron ore.20 These are natural resources that Africa has in abundance. Secondly, Africa's population is seen as a potential market for Chinese products. While Chinese growth relies heavily on manufacturing sector, it needs a new and dependable consumer market to sustain its steep developmental trajectory.21 Thirdly, African manufacturers and other industries had enjoyed many years of monopoly and protection. African countries economic reform liberalized the protected market and opened up the door to increased economic activities from other players elsewhere. Many firms which were hitherto been shut out of the market are now interested in the new markets, including Chinese firms.

Fourthly, the privatization of publicly owned enterprises in China are necessitated with the need to scout for new investment opportunities outside China to complete their transition from the state-owned enterprises. To do this, the privatized enterprises needed to step up entry into international market such as Africa. Supported by China ExIm Bank with annual disbursement of $4 billion in 2000 to $15billion in 2005, Chinese firms are ready to seek opportunities in other countries.22 Lastly by establishing its presence in Africa, China wants to project the image of a global super-power. Moving out of its region, China wants to demonstrate that it could also

16 Piet Konings, 346 17 Piet Konings, 349-350 18 Piet Konings, 351 19 Todd Moss and Sarah Rose, "China ExIm Bank and Africa: New Lending, New Challenges" Centre for Global Development, CGD Notes, November 2006:2 20 Piet Konings, 350 21 David Haroz, 72 22 Todd Moss and Sarah Rose, 1

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compete on the world stage with the United States and countries in Europe.23 Of course, this reason seems to have gained currency given the investment portfolio of Chinese state-owned and private firms across Africa and elsewhere in the world. By implication the US has been forced to recognize China's immense economic power and political influence in the world.

Investment patterns in Africa

China's investment patterns in Africa in recent time have been a grave concern to many including Africans as well as non-Africans. But it seems Chinese investment in Africa has been reported from a sentimental perspective. When two countries trade, the gains that would accrue to each of them would largely be dependent on the structure of output for each of the country and their comparative advantages. In addition the transaction costs in each country would determine if its products would be competitive or not. The case of China and African countries is of no exception. Both China's state-owned enterprises and private sector invest in Africa. However, the philosophy guiding them is quite different. While state-owned enterprises are driven by state's interests and largely invest heavily in the extractive sector, Chinese private companies are driven by market forces and are investing beyond the extractive sector. In addition, the private sector is driven by profit and the goal of creating lasting economic opportunities for host countries.24 Nevertheless, both of them tend to concentrate on different sectors and country.

Generally, a significant investment has come from Chinese state-owned enterprises but investment from the private sector is growing in an unprecedented manner.25 The scale of investment in each sector and country is not the same. This indicates that China's investment in Africa is growing and increasingly diverse and concentration is not necessarily in the extraction sector. Both China's state-owned enterprises and private sector account for $14.7 billion Foreign Direct Investment as of 2012, a growth of more than 60 percent from 2009. Overall, China's investment in Africa has exceeded $40 billion26 in Foreign Direct Investment (FDI), through various kinds of investment.

Nevertheless, a breakdown of Chinese investment pattern shows that each region of the world offers some attractiveness to China. Contrary to the general belief, Asia is China's backyard and attracts the biggest share of its investment and not Africa.27 The widely held opinion regarding

23 David Haroz, 72 24 Xiaofang Shen, "How the Private Sector is Changing Chinese Investment in Africa" Vale Columbia Centre on Sustainable International Investment, No. 93 ( April 2013): 1 25 Jing Gu, "China's Private Enterprises in Africa and the Implications for African Development, "European Journal of Development Research, Vol. 21:4(2009): 573 26 Ambassador David Shinn, China's Investments in Africa, ChinaUSFocus, November 1, 2012: (accessed November 15,2013) 27 Katarina Kobylinski, "Chinese Investment in Africa: Checking the Facts and Figures, Association for International Affairs, Briefing Paper, (July 2012):3 (accessed November 10, 2013)

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Chinese aggressiveness investment in Africa falls like a pack of card in the face of available data.

Fig 1: Total share of Africa in China's global FDI

China's FDI IN Africa (% of Total FDI)

10

8

Total FDI in %

6

4

2

0 2004

2005

2006

2007 Year

2008

2009

2010

Source: UNCTAD Statistics

As shown in Fig 1, at its peak investment Africa is merely 10 percent. Of the global total

percentage of the China's FDI, Africa accounted for 4.3 percent in 2004, peaked at 9.8 in 2008 and declined to 0.3 in 2010.28 By implication, all major Chinese enterprises witnessed a huge

investment between 2005 and 2008, but in 2009 and 2010 their profile has shrunk.

The possible reasons for the decline could be attributable to the general perceptions about doing business in Africa. Africa is still regarded as a difficult place to do business. This has much to do with uncertainties in regulations, layers of regulatory control, multiple types of taxation and political instability. Also not all the investments by Chinese firms in Africa are actually profitable and successful. The initial hype about investing in Africa by the Chinese firm has evaporated. It is on record that one of the China's main global failures occurred in Africa. For example, the investment portfolio of $8 billion by China Civil Engineering Construction Corporation (CCECC) for the upgrade of Nigerian railway shrank to $850 million in 2006.29 In addition, there is a tremendous risk associated with Chinese investment which makes profit

28 Katarina Kobylinsky, 6-7 29 Katarina Kobylinski, 8

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